Loading....
Coupon Accepted Successfully!

 

Determination of Forward Price

  • The price of a forwards contract is given by the equation below:
    • F0 = S0ert in the case of continuously compounded risk free interest rate, r
    • F0 = S0(1+r )t in the case of annual risk free interest rate, r
    • Where:
      • F0: forward price
      • S0: Spot price
      • t: time of the contract
  • Known income from underlying
    • If the underlying asset on which the forward contract is entered into provides an income with a present value, I, then the forward contract would be valued as:
      • F0 = (S0 – I )ert
  • Known yield from underlying
    • If the underlying asset on which the forward contract is entered into provides a continuously compounded yield, q, then the forward contract would be valued as:
      • F0 = S0e(r-q)t
  • q: continuously % of return on the asset divided by the total asset price





Test Your Skills Now!
Take a Quiz now
Reviewer Name